The latest news in the Bitcoin space is one that has been in the making for four years: the Winklevoss’ twins Bitcoin ETF will soon be accepted, or rejected, by the Securities and Exchange Commission (the SEC). This decision will leave ripples in Bitcoin’s history, and it’s the first step to legitimizing Bitcoin’s acceptance with the general public.
Mutual and Exchange-Traded Funds
Funds are important – it’s a building block towards a particular purpose. The most common type of fund – a retirement fund – is a sum of money for after we’ve entered retirement, allowing us to live comfortably in our older years.
There are many kinds of funds, but the two main ones are mutual funds, and exchange-traded funds.
In a mutual fund, you’re sitting around, trying to figure out the best way to invest in the stock market. Your friends are, too. Sure, you could go out and buy a few stocks each, but you don’t really have the time – or the resources – to manage a diverse portfolio of 50, to 100 stocks. You can’t keep up on the news of when to buy and sell; you don’t know all the different buying and selling strategies, and you don’t have a lot of time to learn. So, what do you do?
You and your friends decide to band together, and pool all of your money you’d have spent individually on stocks into a professional investment manager instead. This manager is going to do all the hard work, for a little share of the profit.
To keep track of who has invested what (you might have invested one-thousand dollars, but Bobby next door only invested fifty dollars, the stingy bastard), you and each of your friends receive a share – a little token, representing your stake in the total investment. The more tokens you have, the more you’ve invested.
You still want to know what your money is doing, though, and you want daily updates. So every day, you investment manager tallies up the value of everything it owns, and divides it by the number of shares that exist. Now, you know exactly what each share is worth. If you want to buy more shares, you’re going to know the exact amount of cash to send your investment manager; if you want to sell shares, you’re going to know the exact amount of cash to expect in return. It’s a rather elegant system, and can be used for all sorts of things – stocks, bonds, commodities, and other assets.
An ETF is a type of mutual fund, too, except for one big change. A mutual fund is traded at the end of the day, all at once; an ETF can be traded through the day, like a stock. A mutual fund is steady, and prevents the market from fluctuating at certain hours; an ETF does the opposite, just like a stock, allowing you to potentially make it big if you’re lucky, or clever. Buy shares in the morning, sell them after lunch, buy them again before the sun sets – there’s no limit.
You’ll also be able to perform all sorts of stock-like strategies that you can’t perform with a mutual fund – things like selling short; placing a stop-loss; placing a limit order; or buying on-margin.
In short, an ETF is a powerful tool with the potential for great risk, but even greater reward. But it’s also simple, transparent, tax efficient, and well structured, and you can access it through any brokerage account.
The Effect on Bitcoin
There’s been a number of ETF’s proposed for Bitcoin, and none of them have gone through the strict approval process that the SEC has set up – but the Winklevoss’ twins will finally get a decision this week, on March 11th.
An ETF will open the door for a lot of people to access Bitcoin, but also give it a stamp of approval that has it recognized by financial institutions and investment firms as a legitimate, recognized form of financial security.
Most money managers have a mandate that requires they invest only in registered securities; Bitcoin is not a registered security. These money managers can’t touch Bitcoin for their clients, no matter how good it looks. But with an ETF, institutional money is going to flow into Bitcoin in copious amounts, which not only strengthens Bitcoin as a currency, but strengthens its legitimacy to the public. Bitcoin will no longer be that “thing used to purchase illegal goods” – it will become something you can use for a retirement fund, or an IRA. It will be given a stamp of approval by a high-ranking institution that protects investors best interests. This is big.
We may also see a price jump – a surge of buy orders will flood from eager investors. Liquidity will dry up rather fast, though – most Bitcoin holders won’t sell, holding out for a bigger price or a better future.
But perhaps the most powerful thing the ETF will do is allow the average joe – someone who has very little technical experience – to gain access to Bitcoin. Investors will be able to avoid the process of purchasing Bitcoins on exchanges, handling storage, and dealing with theft and backup. This, in particular, was of huge benefit to the gold industry – you could invest in gold, without having to worry about storing and securing it.